Moniac machine

Economics at school and the undergraduate level is primarily taught as a static subject. Pupils are shown how changing one variable impacts on another (for example, the effect of an increase in demand on the price of milk). They are taught to hold all other things constant (ceteris paribus). However, real economies are of course not that simple. They never stand still, things are rarely held constant and each time any variable is changed, the effects ripple through the economy in a number of ways.

The Moniac shows the circular flow of income, where economic activity is defined as the sum of household expenditure, government expenditure, business investment and export sales, less purchases of imports. Students will know this as Y = C + I + G + (X-M). The water in the Moniac machine represents the stock of money in the economy. As it is pumped to the top of the machine, this money becomes income. Some of this income is drawn off as taxes. The government uses this tax revenue to fund its expenditure, which then comes back into the economy. The remaining disposable income can either be spent (consumption expenditure) or saved. The amount of saving depends on the interest rate and households’ preferences. The money saved becomes loanable funds in the banking system, which firms use to finance their purchases of plant and machinery and buildings. This investment expenditure also re-enters the economy. This gives us domestic expenditure: C + I + G. As domestic expenditure reaches a certain level, domestic production cannot satisfy demand and goods and services are purchased from overseas. Money leaves the system as payments head offshore. New Zealand’s products are also sold in foreign markets, generating export revenue that comes back into the economy. Imports and exports are affected by the prevailing exchange rate. This completes the circular flow, and felt tip markers indicate on pieces of paper the level of GDP, the trade balance and interest rates.

Once in equilibrium, the Moniac can be shocked by changing any variable. For example, the tax rate can be changed. Each time a change is made, the impacts can be traced through the model as it readjusts, representing the multitude of feedback effects that occur in real economies. If the tax rate changes, disposable income changes, which alters savings and incomes, which changes the tax again. Each time a shock occurs, the model solves nine simultaneous equations to achieve a new equilibrium, which will be shown by movements in the felt pens. In essence, it is a pre-cursor to the general equilibrium models that are commonly used in economic analysis today.

Written explanations cannot do justice to the impressiveness of the Moniac – it is something that is best experienced ‘live’. It is a valuable, entertaining and unique teaching tool that shows students that economies are very complex entities in which everything is linked in one way or another and to varying degrees. It underwent a major renovation in 2003 in preparation for being displayed as a key part of the New Zealand exhibition ‘This is the Trekka’ by artist Michael Stevenson at the 2003 Venice Biennale of Contemporary Art.

Visit the online Moniac at the Reserve Bank Museum.